Since the 1997 Asian crisis, most economies in Asia have been pretty stable in terms of the GDP volatility. That includes corporate profits and corporate earnings which in Asia have been reliable as well. Still, Asian equities markets have been a lot more volatile than developed markets, not properly reflected the fundamental facts. The primary reason is that Asian markets are a lot more prone to foreign fund flows that often don’t accurately reflect the real fundamentals of the economies or corporate profits. That means on a medium-term basis there are a lot of opportunities to identify undervalued companies with stable earnings and good visibility on the top line.
Whenever there is an equity cycle that is caused by foreign fund flows, astute investors often have tremendous opportunities to buy cheap and to generate a very good return from fundamental stock-picking. A good example is the 2008 global financial crisis which really had its epicentre in the U.S. where the S&P in that year was down 30% while Asia MSCI ex-Japan Index was down close to 60%, mostly due to foreign capital outflow. But throughout that crisis, Asian corporate profits displayed a much lower volatility and Asian markets also rebounded much faster than the Western World. Still, the equity market volatility was a multiple bigger in Asia than the Western World where the problem was created.
The Asian region suffers from a lack of long term institutional money in this region of the world. That exacerbates the volatility and the effects of foreign fund flows. Asian Central Banks’ reserves are large, but unfortunately very little of that money is in the equity markets. The Asian pension industry is underdeveloped with very little invested assets. Asian managers see the current markets as a multi-year opportunity which in fact could last for at least another decade; if not, longer.
A lot of alternative strategies that are applied globally, specifically in the U.S. and Europe don’t work so well in Asia. That is the reason a large number of Asia-based managers chose to focus on long-biased stock-picking. A lot of strategies that work globally cannot be executed in Asia because of the lack of instruments and the lack of capital structure that you see amongst listed corporates in the region. CTAs and macro work in Asia but a lot of other strategies like mortgage backed arbitrage or simply merger arbitrage will not. Given the information inefficiencies of the Asian markets, stock-picking is seen as the best low hanging fruit, and the managers’ long term results prove that.
It’s important for Asia-focused managers to have the flexibility to be able to take down their net exposure, whether through raising cash or shorting with futures or single stocks. That is why the alternative strategy is essential in Asia. However, most retail investors do not have access to alternative investment strategies. The inability for the Asian mutual fund industry’s retail long-only products to take down the exposure below 90% is a huge disadvantage in Asia.
The Opalesque 2014 Hong Kong Roundtable, sponsored by Eurex, Maples Fiduciary and Eurex, took place in November 2014 at the Hong Kong office of Maples with:
- Edward Hardman, Eurex
- Robert Welzel, WTS
- Hugh Thompson, Maples Fiduciary
- Raymond Wong, Cheetah Investment Management
- Nitin Dialdas, Mandarin Capital
- Barry Lau, Adamas Capital
The group also discussed:
- Why Asian managers launch Spanish and U.K. real estate funds
- How Asian managers and investors have matured and “institutionalised” - changes in corporate governance
- How to generate yields of around 18% through providing credit to Chinese SMEs
- Litigation: How to be successful in the Courts of Law in China
- Private REITs in Japan: How to get over 6% net operating unlevered income yield in Japanese real estate
- Domestic Japanese investors are now planning for an inflationary world and move into risk assets - consequences for the stock markets?
- How do Asian managers deal with AIFMD? What do they think about UCITS and European platform providers?
- What products will be offered on Eurex Asia in Singapore?
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